Churning is a Type of Securities Fraud
What is churning?
Simply put, churning is defined as excessive trading.
While that sounds a bit benign and seemingly acceptable, here’s the catch: investment churning is actually considered to be the excessive purchasing and selling activity of securities (including stocks, bonds, mutual funds, and options) in an investor’s account that serve no practical purpose for the investor. The activity is performed by brokers with the intent to generate commissions without regard for the investor’s interest.
In other words, when a broker is participating in excessive trading activity within an investor’s account that is not necessarily in line with the investor’s investment goals, the broker may be guilty of churning.
According to the SEC and FINRA, this type of broker behavior is not acceptable. Specifically, the SEC considers churning to be illegal and unethical. FINRA has its own rules regarding churning and calls it “quantitative suitability.”
How is churning identified?
In short, when an investor believes that his or her broker is engaging in churning and brings a claim, the investor must show that the trading activity within the account is excessive and that the broker had control of the investment strategy. To identify whether the trading has been excessive there are two common used metrics:
- ‘Cost to equity ratio’
- ‘Cost to equity ratio’ also known as ‘break even percentage’
An important factor to recognize while reviewing churning cases is the commission rate and total commissions in the account along with the excessive trading. If the commissions are higher it tends to serve as additional evidence to support the claim of churning.
What should I do if I suspect my broker of churning?
As an investor, you have rights. If you’re an investor who feels your broker has acted inappropriately it’s important for you to understand your rights. A knowledgeable securities attorney may be able to help you recover financial losses incurred due to such behavior. The key is to select an experienced securities attorney well versed in securities arbitration, and one with a strong track record in successfully recovering client losses. In the case of churning, securities law explicitly forbids this type of activity, which can result in a violation of SEC Rule 15c1-7.
The attorneys at Silver Law Group represent investors nationwide and are committed to helping investors recover investment losses through stockbroker misconduct. Our consultations are free and the firm is compensated only when we are successful in recovery. Contact us today to discuss your rights as an investor in greater detail.